Ireland

Back in February, as part of the latest Greek bailout of European banks, we noted that the most subversive part of the German-led proposal was nothing short of a gold confiscation scheme. Today, courtesy of The Telegraph, we learn that Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a newed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal. In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!

But why Gold? Why not spam. After all gold is selling off, spam is stable, and the dollar is soaring. Couldn't Germany merely demand that broke countries simply pledge all their USD reserves, and keep their worthless, stinking yellow metal? Apparently not.

Slowly, surely the largest investors in the world are no longer buying the debt of Europe. Recently the Chinese sovereign wealth fund, China Investment Corp., said that they were done and would no longer be buying European debt. The risks are just too great and the way Europe does business is also having a serious effect. You see, Europe does not count any contingent liabilities, sovereign guaranteed debt, derivatives, bank guaranteed debt, regional guaranteed debt or promises to pay for various entities as part of their calculation for their debt to GDP ratios. What can clearly be said then is that the numbers we are given, the data that is flouted day in and day out as accurate is nothing short of a con game built on a Ponzi scheme that rests on the back of a financial system that has been purposefully designed to distort the truth. Regardless of your opinion about all of this there are consequences to this type of manipulation that are in the process of becoming realized. Eventually, when hopes and prayers give way to reality, losses are taken and I submit that we are just at the beginning, just at the start, of seeing realized losses begin to hit balance sheets. The European nations and banks have performed a neat new trick, nailing themselves to the Cross, and it is now only for Pontius Pilate to pick up the spear and begin.

• JPMorgan dips into cookie jar to offset "London Whale" losses: firm has sold $25 billion to offset CIO losses (Reuters)
• Storied Law Firm Dewey Files Chapter 11 (WSJ)
• The European "Wire Run" - Southern Europeans wire cash to safer north (Reuters)
• Bankia Tapping Depositors for Bonds Leaves Spain on Bailout Hook (Bloomberg)
• Glitches halt new Goldman trade platform (FT) such as reporting prices and seeing trading spreads collapse?
• Japan, China To Launch Yen-Yuan Direct Trading June 1 (WSJ)
• Another fault line? Italy Quake Kills Nine in North of Country (Bloomberg) shortly following another Italian quake
• RIM Writedown Risked With $1 Billion Inventory (Bloomberg)
• China’s Wage Costs Threaten Foreign Investment, EU Chamber Says (Bloomberg)
• Dollar Scarce as Top-Quality Assets Shrink 42% (Bloomberg)

One of the problems with the Hispanic Pandora's box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study "example" of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be "everyone else." But before we get there, we just get a rude awakening from The Telegraph's Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: "where is the €23.5 billion for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion."...  And in an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled "Spain Delays and Prays That Zombies Repay Debt." We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else's face off with tragic consequences for all involved.  What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.

The person who has caused global stock markets so much consternation by daring to play chicken with Germany until the bitter end conducts a  no holds barred interview with Germany's Spiegel. There is little love lost between the Syriza leader and the Germans, who were quite surprised to find a political leader who is willing to play blink with Germany, with the ECB, and the developed world until the very end, or June 17, whichever comes sooner. Tsipras' bottom line: "We're trying to convince our European partners that it's also in their interest to finally lift the austerity diktat." Alas, the European "partners", as evidenced by Lagarde's Guardian interview this weekend, have an image of Greece as a bunch of lazy tax evaders, who only seek to mooch on the German teat, resulting in 60% of Germans now pushing for Greece to be kicked out of the Euro, consequences be damned. Nothing new there. What is curious is Tsipras' answer to the question everyone wants to ask: "If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?" His response: " I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit...we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts." Yet the line that will draw the most ire out of the already exhausted German taxpaying public is the following:

"if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel."

Well, in the US, it is all Bush's fault; in Greece, it appears to be Merkel's.

While America may be experiencing the occasional zombie apocalypse breakout, probably due to the absence of easily available edible iPads, Greek retailers are preparing for the retail version. "British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot. The planning, says Dixons chief Sebastian James, may look alarmist but it's good to be prepared." Why Dixons? "Europe's No 2 electrical retailer Dixons owns Greece's market leading but loss-making Kotsovolos chain, which has a 25-percent market share selling iPads and laptops as well as washing machines, televisions and air conditioning units." There we go: Bill Dudley's edible iPads. The question is what happens when this easily digestable piece of plastic is thoroughly looted after local rioters dispense with the "shutters" supposedly protecting their wares. What will be on the menu next? Sadly not booze: "Diageo, the world's biggest spirits group and the name behind Johnnie Walker whisky and Smirnoff vodka, has reacted by slashing its marketing spend in Greece, reducing stock levels and pulling cash quickly out of the country after it saw its Greek sales halve in the last three years to less than 100 million pounds." So: no food, no booze, no cheap 99 cent iPad aps: this is the way the world's most miserable monetary experiment ends.

Back when Dexia was nationalized in the fall of 2011, one of the running jokes was that it was the bank that had one of the highest grades in the European Stress Test conducted just months prior. Here is another joke: we now know that Spain's Bankia is the next major financial institution which is being nationalized, and whose bailout costs are literally growing by the hour. Was Bankia one of the Stress Test 2011 failures? Why of course not...  But 5 other Spanish banks were.

Put another way, those Greek bondholders who DIDN’T go for the Second Bailout, just got their money back at 100 cents on the Dollar (compared to those who DID go for the Second Bailout and lost 70% of their money). This has shown the ECB and EU bureaucrats to be complete and total liars. It also shows the entire bailout/ austerity measures process to be garbage. 

"We think the ramifications of a Greek exit are more serious than the market anticipates", is how Morgan Stanley starts their European strategy report this week. They have raised their probability of a Euro break-up to 35% but the most likely outcome they foresee is a Euro divorce with Greece's exit preceded by strong contagion via three main transmission channels: the sovereign, the banking sector, and the political situation. Italy, Spain, Ireland, and Portugal are unsurprisingly the most at risk of material contagion and they recommend investors stay positioned defensively across risky assets as we remain in the 'Crisis' stage of the so-called C.R.I.C. cycle - and they note that unlike so many knife-catching US equity and Italian bond buyers, it is not sensible to try to pre-empt the Response phase of C.R.I.C. cycle. There appears to be four scenarios (and evolutions) for the future of Europe (from Renaissance to Divorce with Staggering On and an awkward 'Italian Marriage' in between) and we drill into the four additional possibilities under the divorce scenario for insight into the effects various risky asset classes will feel in each case.

Euro bonds “didn’t find much support” at the EU conference.
                              -Jean-Claude Juncker

“A majority of European Union leaders at a Brussels summit this week backed joint euro-area bonds.”
                             -Mario  Monti

Encapsulated in these two comments is the problem that Europe is now facing. Two views, two radically different positions and no agreement on a middle ground because there is not one. Of course the periphery countries, the weaker nations want Eurobonds because it would dramatically drop their cost of funding. Of course Germany and their stronger EU countries do not want it because it would dramatically raise their cost of funding. Nations, in the end, will act in their own self-interest, this has been proven more than enough times in history, which is why I stand by my conclusion that Eurobonds will not be forthcoming regardless of the polite rhetoric attached to them.

The story of Facebook’s disappointing IPO is a gripping tale, and it holds some valuable lessons. But it concerns an event that has already happened. Forget Facebook — there are far more interesting events in play and that will affect you, if only at the margins. They haven’t happened yet, and they may not happen at all. But if they do, you’d sure as hell better have a plan.

Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone. In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire. In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery.

We will start with an appetizer of Liquidity Tenders and Securities Market Program Bond Purchases, move on to a plate of Emergency Liquidity Assistance, sample a pre-entre of Pro-Growth measures and ECB Covered Bond purchases, dive into an entre of Fed Swap Lines, medium rare, with a side of Emergency Liquidity Assistance, and finally unwind with a desert plate of Firewalls. To close we will dream of tomorrow' menu which some say may feature the mythical Eurobonds and even the, gasp, legendary Europan Bank Deposit Guarantee... Please charge it all to the taxpayer, of course.

While hard information is scarce, concerns about deposit flight from Greek banks have increased since the 6 May elections. To the extent that such flight arises from liquidity concerns, the ECB can contain it (or its impact) via its various monetary policy and ELA operations. But, as Goldman Sachs notes in its Focus today, the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities.  Politically, it will not be domestically popular in Germany (inter alia) to extend such guarantees, however much Germany may benefit from arresting the financial instability deposit runs may cause. And institutionally, in order to contain the threat of free-riding on the guarantee of others, entering into a pan-Euro area deposit guarantee would need to be associated with a deepening of the pan-Euro area system of financial supervision and regulation. This would involve substantial loss of sovereignty relative to the status quo and require significant institutional innovation. However, attractive in principle, even Goldman agrees with our skeptical perspective that it is unlikely that such a guarantee can be implemented credibly in short order. So, what would you do with your hard-earned deposits? Demand them or leave them at the bank on the basis that the EU leaders will do what they promise - this time is different.

Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.